Northern Rock and Stone Age Economics

The Bank of England backs a national bank as lender of last resort. Within a day of the announcement, Northern Rock customers flocked to their local branches. The great panic had begun. Assurances by the Chancellor of the Exchequer, various officials from the Bank of England, and the CEO of Northern Rock had little impact

The queues continue to grow

To be sure, the company has not helped itself, as a drama turned into a crisis. The cardinal rule under these circumstances is to find some way of making specific information available as rapidly as possible. Instead, the Bank was unable to deal with the technical problems following the crash of its website (presumably through sheer weight of attempted traffic).

Timeline of a crisis

Friday September 14th 2007. Radio and TV media throughout the day showed the growing queues outside selected branch offices. Nervous depositors and mortgage holders were interviewed. The beautiful impartiality of the media shone through the reports. Or was it the icy heartlessness which Graham Greene considered was the characteristic of the creative temperament? It’s an old debate.

The emergency lending facility to Northern Rock was agreed by Mr Darling, on advice from Mervyn King, governor of the Bank of England. Northern Rock chief executive Adam Applegarth said that it had not yet borrowed any of the “unlimited” funds available… [The Chancellor, Mr Darling] said that “in order to create a stable banking system, the Bank [of England] steps in and it makes facilities available to the Northern Rock.” .. Angela Knight, chief executive of the British Bankers’ Association, said that anybody who was “either a saver with Northern Rock or has got a mortgage… can be absolutely confident that they have got their money with or they have borrowed from a very sound financial institution.”

All the calming words did not stop some Northern Rock customers [attempting] to move some or all of their money to accounts with other banks.

Saturday 15th September.

Media reports concentrate on the big story. Big queues. Panic. Anxiety No ice in the heart from the customers. I imagined they would be mostly the inadequates and mostly poor and uninformed people. Confused casualties. Instead I heard interviews with articulate pensioners. Young house-holders. A university lecturer. Recently retired business people. (What sort of business?). Many had come with friend or family support. Some had knowledge of the likely downside to their investments. Maximum £900 from over £30,000. One was intending to retrieve £10. Others talked of £100,000. Taken collectively, these groups far from matched my stupidly simplistic expectations. These worried lines of people had more financial resources than you might expect from a queue of people to be found at a post office each week on ‘benefits day’. Was it time, too, for me to revise a long-held image of ‘ordinary people’ flocking to their banks in the financial crash in 1929?

This seems an example of mild hysteria to be witnessed at airports as crowds build up around desks, seeking information during a flight delay. I recognised the ‘nobody seems to know anything. They won’t tell you anything. I don’t believe what I’ve been told, anyway. They [the ‘they’ of possible mightmares] can’t ever be trusted. Politicians. Bankers. Airlines’.

The BBC treatment has been clumsy. Not so much ice in the heart, as unthinking. Northern Rock customers (those who were not queueing) were being advised to go to the BBC website. Where they would find the main report asking what if Northern Rock goes bust.

There was excellent information (as there generally is) to be obtained. That’s why I like the BBC coverage of national stories. But its efforts to become both more commercial and demonstrate its independence are regularly less than impressive. An earlier piece entitled Market Jitters and your pocket was also on offer

The piece on Financial Jitters: Lessons from History was informative about that Mother of Financial Crashes in 1929. Tucked away in that report was the steps taken internationally to avoid such an event happening again. The piece quite rightly pointed out that nothing is certain in life, and any deposits are theoretically vulnerable.

Overall, the Northern Rock customers who failed to get information on the corporate website seem to have remained in a state of high anxiety.

Leadership reflections

What sort of leadership are we observing here? Adam Applegarth was widely regarded as a skilful leader in Northern Rock’s transformation from a little Building Society into an international bank. He pioneered an imaginative business model which was in tune with clever notions of slicing and dicing investments and loan risks. Admiring enthusiasts of the mathematics of derivatives have been particularly impressed.

His experience in working his way up to the top of the organization suggests ability, energy and intelligence. In hindsight it is easy to suggest that the company was still not too far away from the management skills of a much smaller institution. Cynics tends to warn against investment in swanky new headquarters of the kind Northern Rock is building. And what to make of the unusual skills for a chairman, Dr Matt Ridley, better-known as a journalist and popular science writer on socio-biology (unkindly sometimes described as stone-age economics)?

Or a company committing a proportion of profits to charity through its own charitable foundation. Quirky and admirable maybe. Or too clever by half, and undone by market circumstances?

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7 Responses to Northern Rock and Stone Age Economics

While the silver savers who are flocking to branches of Northern Rock are indeed contributing the the companies very downfall, who can blame them. Indeed I am one of those who have ‘panicked’ and drawn their money out. Forgive me, but I believe anyone who has over £35,000, the statutory amount that you would be guaranteed as safe in the event of the banks collaps, would do the same.

It is utter nonsense to suggest that my not insignificant savings should not be withdrawn as the very act is wounding the company. Do I care?, of course I do. However, not enough to risk the sacrifice of my hard earned money. I may be a charitable person, I give to shelter on a very regular basis, but lets get one thing straight, this is a two way arrangement. I deposit my hard earned cash, Northern Rock pay good interest on my investment and lend it out to mortgagees, everyone is happy.

However, is it my fault as a saver, that Northern rock exceeded sensible lending in an increasingly difficult market, to such an extent that they cannot furnish the loans that they promise, of course not. We are victims of a global credit crunch, but don’t blame me.
Blame those stupid lenders in America who advanced money to high risk trailer trash who did not have a hope in hell of paying back increasingly advancing mortgage payments. It’s not my fault, so why do I feel a certain amount of misgiving as I congratulate myself on gaining access to the northern rock website. I danced around the kitchen with jubilation when I had successfully shifted my money to a seemingly safer banking entity that would nurture my money and keep it safe from risky enterprise.

We shall see, but don’t blame me when the company previously known as Northern Rock has a different brand identity thrust upon it as it most assuredly will when a buy out occurs later in the coming week. Mark my words, the ‘stupid withdrawers’ who have put the company at risk will bear the brunt of the blame, I include myself in this number. There always has to be somebody to blame lets blame the savers, stupid people.

I’m pleased you were able to shift your e-savings. When writing the post I asked myself what would I do this week-end if I had been an investor in NR. Decided the answer was too dependent on specific circumstances, one of which is the internet banking set-ups.

I also agree there will probably be a buy-out. Not sure if its weeks or months. Although I suspect the immediate and greatest losers will be staff at Northern Rock. Would I have tried to switch? Possibly, particularly if I knew what was ‘safer, and the penalties seem to be justified. But I suspect I would have been a bit twitchy before this weekend.

There’s a real issue about the information people are getting about their investments.
For me, it’s not about being fair to the Bank, but dealing with the somewhat misleading information on display in the High Street.

As for stupidity and blame. I berated my own stupidity in the post. And on the glass houses and stones principle, I’m leaving it at that.

Good luck with your new investment haven. May it never betray your current confidence in it.

I can only wish for a ‘safe investment haven’ I don’t believe that it exists and I do not really hold out any major confidence at present. I do also fear that the staff at Northern Rock will be the major losers in the short term, followed obviously by ‘cash hungry investors’. I have spoken to staff of this shipwrecked company over the last two days and have found them unfailingly helpful, particularly as far as firstly, attempting superb damage limitation tactics and when that failed, encouragement as to how i might access the website if I waited for people to go out on a Saturday night,

The media can and have contributed to a general feeling of disquiet that has contributed to my heart felt desire to get my money and hang on to it when my brain is saying don’t be ridiculous the company won’t go down. However, heart ruled and there we are. I pride myself that I possess a logical and practical outlook but this logical outlook failed me on a stupendous scale. Good luck to all those who have investments in Northern Rock, I wish you well. Good luck to all those who have their life savings deposited with NR, I also wish you well. Where do i go next, who knows. However, one thing is for sure, if NR are flailing now, others will follow.

This fast-changing story deserves full-time attention. More than I’ve got to lavish on it. It will become a footnote in the evolving history of financial management in the early 21st Century. I’ve been watching some future leaders learn the ropes (literally) in the Lake District. Wading through the news I discover that after more frantic changes, NR now has some wriggle room. Queues subside most quickly around Newcastle itself.

As even Michael Owen seems to be recovering, it’s not all doom and gloom for the Toon. Later news. Michael Owen in new injury scare. Leter news. Michael Owen not as seriously injured as feared.